The New York Times Didn't Hear About the Euro Zone Crisis

Thursday, 05 June 2014 04:11

It's apparently difficult for the New York Times to get very basic economic information, or at least to remember it. That is the implication of an article that discusses the benefits that joining the euro offers to Lithuania and other non-euro zone EU countries.

The article pointed out that tying a country's currency to the euro eliminates its ability to improve its competitiveness by lowering the value of its currency. It then points out:

"Lithuania has tied its currency, the litas, to the euro for a decade. So it is will not really give up any room to maneuver. On the contrary, use of the euro relieves the country’s central bank of the stress of having to defend the value of the litas on currency markets."

This assertion ignores the fact that the European Central Bank (ECB) has not been a reliable guarantor its currency and the debt of the countries in the euro zone. For this reason, at the peak of the crisis countries paid an additional risk premium as a result of being in the euro zone.

This was most evident in the difference between interest rates on Finish and Danish debt. In principle, the interest rate on these two countries debt should have been very close. Both were relatively healthy economies with modest debt burdens. Yet Denmark, which tied its currency to the euro from its inception, but did not join the euro, consistently had a lower yield on its debt. The implication is that being a euro member during the crisis imposed a burden, at least on a relatively healthy economy. It was not an asset as implied in this article.

The article also implies that joining the euro would allow Lithuania to benefit from the ECB's policies to fight deflation. After noting the economic crisis facing Greece the article tells readers:

"In fact, the European Central Bank is now preoccupied with preventing other countries from slipping into the same deflationary cycle of falling prices and wages as Greece."

While the bank may be "preoccupied" with combating deflation, its policies have been a disastrous failure in this respect. The inflation rate in the euro zone is just 0.5 percent, well below the bank's 2.0 percent target (which is arguably far too low). The economy of the euro zone is operating far below its potential by every measure, with excess unemployment running in the millions. And, according to research from the International Monetary Fund, this is leading to long-term costs in the form of lower potential GDP.

In short, there is considerable evidence that the ECB has done considerable damage to the economies of its members. This article ignores this evidence.

Ewing and Kanter write a short story about a bit actor while barely mentioning the more interesting story. Poland. Why a country of 3 million people wants to join the Euro is not as important as a story about a country of 38 million (Polands GDP is more than an order of magnitude larger) that refuses to take such a path. Wait, that might require research and (shiver) analysis. Definitely not in the NYT model.